Macroeconomics and unemployment - Essay Example

Macroeconomics and Unemployment Macroeconomics and unemployment Introduction Unemployment is the at which an individual is willing and able to work and is looking for a job. Macroeconomics is a branch of economics which deals with the performance structure, decision making and behavior of the entire economy. It is within Macro economics that unemployment rate is discussed. There are two policies in macro economics that determine to explain unemployment and they are fiscal and monetary policies.

Discussion Macro economics as field in economics has its roots from business cycle theory and monetary theory. In the monetary theory which is mathematically written as M.V=P.Q. in the prior equation, money velocity and quantity of goods are assumed as constants. They are respectively represented by initials V and Q in the equation. So it is safe to say increase in money supply would lead to an ultimate increase in price level (Layard & Layard, 2005, p 39). This is related to unemployment in the current economic events in the case that there is a decrease in the money levels in the economies in the world hence there is decrease in general price level of goods.

This in turn leads to industries dropping the outputs. In the long run it leads to unemployment due to the fact of decreased output in firms (Layard & Layard, 2005, p 95). Monetary policy This is the process by which the monetary authority of a country, namely the central bank controls the supply of money. This is often targeted on the interest rates in the nation with the intention of ensuring economic growth and stability (Michl, 2002, p 76). Monetary policy is subdivided into types. These are: Inflation targeting Under this policy the goals are to maintain inflation at a desired range.

This is achieved by the periodic adjustments to the central banks interest rates target. Changes in the rates are made in response to the various market indicators of economic forecast. When these are made it may lead to increase in interest rates. An increase in interest rates will mean that there is general increase in prices. These increases are accompanied by decrease in demand. In the ultimate end there will be decrease in outputs which will lead to unemployment. This is seen in the recent day unemployment cases (Michl, 2002, p 89).

Price level targeting This is the same as inflation targeting with the only difference being that there is offsetting in subsequent years of the consumer price index. The main aim is to set the prices of commodities which will help the consumer to forecast. Because it deals purely on speculation, the probable increase in price will lead to the consumer hoarding money. This will lead to low buying rates which leads to unemployment in the long run as can be witnessed with the current world economics (Michl, 2002, p 67).

Monetary aggregates This approach focuses on the increase or the decrease of constant supply of money. In the current economy there is a probability of decrease in money supply in the future due to inflation hence the money authority is holding back money in order for it to give money value. This has meant that there is little money flowing in the economy hence there are no work stations or firms willing to employ which has led to unemployment (Michl, 2002, p 34). Fixed exchange rates This policy tries to maintain a fixed exchange rate amongst countries.

In this policy there monetary authority maintains the currency exchange rates in order to curb inflation. This can be done through holding onto money in the reserves which in the long run leads to lack of money due to minimal money supply and finally unemployment (Barro, 2008, p 56). Fiscal policy This is the use of government expenditure and revenue collection which in brief is taxation to influence the economy. If fiscal policies are undertaken they affect the economy directly. Governments use fiscal policies to influence the level of total demand in an economy.

When the government increases it’s spending and reduces taxation it increases the total demand in a nation (Layard & Layard, 2005, p 67). The modern day unemployment is affected by this mode in the sense that there is reduced government expenditure and high taxation rates. This is affecting the economy in the sense that there is not enough money flowing in the economy hence there tends to be low demand which eventually leads to unemployment as witnessed in the current world (Barro, 2008, p 103).

Conclusion From the foregoing literature it is seen that the government and the financial bodies are always at the top of monetary policies in a country. The modern day unemployment can be investigated economically and proven in the sense that there is a lot of unemployment due to fiscal and monetary policies. It is therefore correct to conclude that the current unemployment rates are diversely affected by macroeconomics. References Barro, R. J. (2008). Macroeconomics: a modern approach. New York: Cengage Learning.

Layard, R., & Layard, P. R. (2005). Unemployment: macroeconomic performance and the labour market. London: Oxford University Press. Michl, T. R. (2002). Macroeconomic theory: a short course. New York: M.E. Sharpe.